University of Jordan Faculty of Business Strategic Management “McDonald's”

Case Study STRATEGIC MANAGEMENT

Prepared By
Fathi Salem Mohammed Abdullah

2009

Table of Contents

Topics

Introduction History analysis Vision, Mission, Value The Five Forces Framework PESTEL Framework External Audit CPM-Competitive Profile Matrix External Factor Evaluation (EFE) Matrix Financial Ratio Analysis Internal Audit Internal Factor Evaluation (IFE) Matrix SWOT Matrix SPACE Matrix Grand Strategy Matrix The Boston Consulting Group (BCG) Matrix The Internal-External (IE) Matrix The Quantitative Strategic Planning Matrix (QSPM) Recommendations

Page 3 3 4 5 6 7 8 9 10 12 13 14 15 16 17 17 18 20

Introduction:
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McDonald's Corporation is the world's largest chain of fast food restaurants, serving nearly 47 million customers daily through more than 31,000 restaurants in 119 countries worldwide. McDonald’s sells various fast food items and soft drinks including, burgers, chicken, salads, fries, and ice cream. Many McDonald's restaurants have included a playground for children and advertising geared toward children, and some have been redesigned in a more 'natural' style, with a particular emphasis on comfort: introducing lounge areas and fireplaces, and eliminating hard plastic chairs and tables. Each McDonald's restaurant is operated by a franchisee, an affiliate, or the corporation itself. The corporations' revenues come from the rent, royalties and fees paid by the franchisees, as well as sales in company-operated restaurants. McDonald's revenues grew 27% over the three years ending in 2007 to $22.8 billion, and 9% growth in operating income to $3.9 billion.1 History analysis:  The business began in 1940, with a restaurant opened by brothers Dick and Mac McDonald in San Bernardino, California.  Their introduction of the "Speedee Service System" in 1948 established the principles of the modern fast-food restaurant.

 The original mascot of McDonald's was a man with a chef's hat on top of a hamburger shaped head whose name was "Speedee." Speedee was eventually replaced with Ronald McDonald in 1963.  The present corporation dates its founding to the opening of a franchised restaurant by Ray Kroc, in Des Plaines, Illinois on April 15, 1955 , the ninth McDonald's restaurant overall. Kroc later purchased the McDonald brothers' equity in the company and led its worldwide expansion and the company became listed on the public stock markets in 1965.

1

http://en.wikipedia.org.

3

With the expansion of McDonald's into many international markets, the company has become a symbol of globalization and the spread of the American way of life. Its prominence has also made it a frequent topic of public debates about obesity, corporate ethics and consumer responsibility.2

Vision To be the best and leading fast food provider around the globe Mission McDonald's brand mission is to be our customers' favorite place and way to eat, and improve our operations to provide the most delicious fast food that meet our customers' expectations. Values Our values summarized in "Q.S.C. & V.". Provide good quality, services to customer. Have a cleanliness environment when customer enjoys their meal. The value of food product makes every customer is smiling.

Potential entrants

Suppliers

Competitive rivalry

Buyers

The Five Forces Framework
2

http://en.wikipedia.org.

4
Substitutes

The Threat of Entrants
Large established companies with strong brand identities such as McDonald’s BKC, YUM, and WEN do make it more difficult to enter and succeed within the marketplace; new entrants find that they are faced with price competition from existing chain restaurants.

Bargaining Power of Buyers
Low bargaining power of buyers.

Bargaining power of suppliers
Bargaining power of suppliers within the fast food industry would be relatively small, unless the main ingredient of the product is not readily available.

Threat of Substitutes
This could range from a competitive fast food restaurant to family restaurant to a home cooked meal.
5

Competitive Rivalry
The strength of competition in this industry is very high; the main rivals are BKC, YUM, and WEN. They compete with international, national, regional, local, retailers of food products (restaurants, quick service, pizza, coffee shops, and supermarkets).

PESTEL Framework:
Political:
• The international operations of McDonald’s are highly influenced by the individual state policies enforced by each government.

Economic:
• • • • • McDonald’s has the tendency to experience hardship in instances where the economy of the respective states is hit by inflation and changes in the exchange rates. Market leader. Very high target market. Low cost and more incomes. The rate at which the economy of that particular state grows determines the purchasing power of the consumers in that country.

Social:
• •

Working within many social groups. Increase employments.

Technological
• Advanced technology development. Environmental: • Quality standards. • Quality packing. • Local manufacture using foreign supplies.

6

Legal:
• •

Legislation for product. Sustained logo.

External Audit:
Opportunities
1.

Threats 1. Health professionals and consumer activists accuse McDonald's of contributing to the country’s health issue of high cholesterol, heart attacks, diabetes, and obesity. 2. The relationship between corporate level McDonald's and its franchise dealers. 3. McDonald’s competitors threatened market share of the company both internationally and domestically. 4. Anti-American sentiments. 5. Global recession and fluctuating foreign currencies. 6. Fast-food chain industry is expected to struggle to meet the expectations of the customers towards health and environmental issues.

Growing health trends among consumers Globalization, expansion in other countries (especially in China & India). Diversification and acquisition of other quick-service restaurants. Growth of the fast-food industry. Worldwide deregulation. Low cost menu that will attract the customers. Freebies and discounts.

2.

3. 4. 5. 6. 7.

7

CPM-Competitive Profile Matrix
Critical Success Factors Price Financial Position Consumer Loyalty Advertising Product Quality Innovation Market Share Management Global Expansion Total Weight 0.15 0.08 0.10 0.10 0.10 0.15 0.10 0.07 0.15 1 McDonald's Rating Weighted Score 4 0.60 4 0.32 4 3 4 3 4 4 4 0.40 0.30 0.40 0.45 0.40 0.28 0.60 3.75 Burger King Rating Weighted Score 3 0.45 3 0.32 3 3 3 3 2 3 2 0.40 0.30 0.40 0.45 0.20 0.21 0.30 3.03 Yum Brands Rating Weighted Score 3 0.45 3 0.24 3 4 4 3 3 3 3 0.30 0.40 0.40 0.45 0.30 0.21 0.45 3.20 Wendy's Rating Weighted Score 3 0.45 2 0.16 2 2 2 2 2 3 1 0.20 0.20 0.20 0.30 0.20 0.21 0.15 2.07

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External Factor Evaluation (EFE) Matrix
Key External Factors Opportunities Growing health trends among consumers Globalization, expansion in other countries (especially in China & India). Diversification and acquisition of other quickservice restaurants. Growth of the fast-food industry. Worldwide deregulation Low cost menu that will attract the customers. Freebies and discounts. Weight 0.08 Rating 3 Weighted Score 0.24

0.12 .04 .10 .04 .08 .08

4 3 3 2 2 1

0.48 0.12 0.30 0.08 0.16 0.08

Threats Health professionals and consumer activists accuse McDonald's of contributing to the country’s health issue of high cholesterol, heart attacks, diabetes, and obesity. The relationship between corporate level McDonald's and its franchise dealers. McDonald’s competitors threatened market share of the company both internationally and domestically. Anti-American sentiments. Global recession and fluctuating foreign currencies. Fast-food chain industry is expected to struggle to meet the expectations of the customers towards health and environmental issues. Total

0.10

3

0.30

0.09 0.12 .07 .04 .04 1.00

3 4 2 3 2

0.27 0.48 .14 .12 .08 2.85

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Financial Ratio Analysis 12/2007 Growth Rates % Sales (Qtr vs year ago qtr) Net Income (YTD vs YTD) Net Income (Qtr vs year ago qtr) Sales (5-Year Annual Avg.) Net Income (5-Year Annual Avg.) Dividends (5-Year Annual Avg.) Price Ratios Current P/E Ratio P/E Ratio 5-Year High P/E Ratio 5-Year Low Price/Sales Ratio Price/Book Value Price/Cash Flow Ratio Profit Margins % Gross Margin Pre-Tax Margin Net Profit Margin 5Yr Gross Margin (5-Year Avg.) 5Yr PreTax Margin (5-Year Avg.) 5Yr Net Profit Margin (5-Year Avg.) Financial Condition Debt/Equity Ratio Current Ratio Quick Ratio Interest Coverage Leverage Ratio Book Value/Share Investment Returns % Return On Equity Return On Assets Return On Capital Return On Equity (5-Year Avg.) Return On Assets (5-Year Avg.) Return On Capital (5-Year Avg.)

McDonald's -3.30 84.70 -22.60 6.53 23.39 32.36 14.7 N/A N/A 2.62 4.62 11.20 36.7 26.2 18.3 33.9 19.8 13.7 0.76 1.4 1.3 N/A 2.1 12.00 32.2 14.9 17.0 19.7 10.0 11.4
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Industry 4.20 47.90 -59.90 8.14 15.30 22.36 14.2 9.5 4.7 1.88 3.54 10.00 32.1 17.2 12.0 33.3 14.2 9.8 .80 1.2 1.1 1.2 -5.3 10.00 44.4 11.3 13.7 22.8 8.98 11.0

S&P 500 -3.80 8.40 -94.80 13.26 14.45 12.30 13.0 12.5 2.0 1.47 3.00 9.00 39.4 13.2 9.1 39.1 16.6 11.45 1.03 1.4 1.1 29.9 1.9 19.75 27.9 8.1 11.2 20.6 8.5 11.5

Management Efficiency Income/Employee Revenue/Employee Receivable Turnover Inventory Turnover Asset Turnover Date 12/07 12/06 12/05 12/04 12/03 Avg P/E 26.50 16.10 15.80 15.60 17.10

10,783 58,806 23.7 125.7 0.8 Price/ Sales 3.13 2.66 2.25 2.20 1.85 Price/ Book 4.49 3.45 2.81 2.87 2.62

9,401 98,207 44.7 98.7 1.1

91,499 1,000,000 15.8 12.3 1.0

Net Profit Margin (%) 10.2 13.7 13.5 12.2 8.8

Date 12/07 12/06 12/05 12/04 12/03

Book Value/ Share $13.11 $12.84 $11.99 $11.18 $9.50

Debt/ Equity 0.61 0.54 0.67 0.65 0.81

Return on Return Equity (%) on Assets (%) 15.3 7.9 18.5 9.9 17.0 8.6 16.0 8.2 12.6 5.8

Interest Coverage 9.5 11.0 11.0 9.9 7.3

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Net Worth Analysis 12/2007 (in millions) 1. Stockholders' Equity + Goodwill= 15,279.80+2,301.30 2. Net income x 5 = 2395.10 x 5 3. Share price = 58.91/EPS 2.02=$29.16 x 2,395.10 4. Number of Shares Outstanding x Share price = 1,165x58.91 Method Average $17,581.10 $11,975.50 $69,849.18 $68,630.15 $42,009

Internal Audit
Strength Weakness 1. 2. Unhealthy food image. High Staff Turnover including Top management 3. Customer losses due to fierce competition.

1. Strong brand name, image and
reputation. 2. 3. Large market share. Strong global presence.

4. Specialized training for managers known 5.
as the Hamburger University. McDonalds Plan to win focuses on people, products, place, price and promotion.

4. Legal actions related to health
issues; use of trans fat & beef oil.

5. Uses HCFC-22 to make
polystyrene that is contributing to ozone depletion. 6. Ignoring breakfast from the menu.

6. Strong financial performance and
position. 7. 8. 9. Introduction of new products. Customer focus (centric). Strong MCD's performance in the global marketplace.

12

Internal Factor Evaluation (IFE) Matrix
Key Internal Factors Strengths Strong brand name, image and reputation. Large market share. Strong global presence. Specialized training for managers known as the Hamburger University. McDonalds Plan to Win focuses on people, products, place, price and promotion Strong financial performance and position. Introduction of new products. Customer focus (centric). Strong performance in the global marketplace. Weaknesses Unhealthy food image. High Staff Turnover including Top management Customer losses due to fierce competition. Legal actions related to health issues; use of trans fat & beef oil. McDonald's uses HCFC-22 to make polystyrene that is contributing to ozone depletion. Ignoring breakfast from the menu. Total Weight 0.12 0.10 0.04 0.04 0.12 0.08 0.06 0.06 0.08 Rating 4 4 3 3 4 4 4 4 4 Weighted Score 0.48 0.40 0.12 0.12 0.48 0.32 0.24 0.24 0.32

0.08 0.04 0.04 0.04 0.04 0.06 1.00

1 1 1 2 2 1

0.08 0.10 0.04 0.08 0.08 0.06 3.16

13

SWOT Matrix

14

1. 2. 3.

Strengths Strong brand name, image and reputation. Large market share. Strong global presence.

1.

Weaknesses Unhealthy food image.

2. High Staff Turnover including
Top management. 3. Customer losses due to fierce competition.

4. Specialized training for managers
known as the Hamburger University. 5. McDonalds Plan to Win focuses on people, products, place, price and promotion. 6. 7. Strong financial performance and position. Introduction of new products. 8. Customer focus (centric).

4. Legal actions related
to health issues; use of trans fat & beef oil.

5. Uses HCFC-22 to make
polystyrene that is contributing to ozone depletion.

6. Ignoring breakfast from the menu.

9. Strong performance in the
global marketplace.

1.

Opportunities Growing health trends among consumers. Globalization, expansion in other countries (especially in China & India). Diversification and acquisition of other quickservice restaurants. Growth of the fast-food industry. Worldwide deregulation. Low cost menu that will attract the customers. Freebies and discounts.

2. 3. 4. 5. 6. 7.

S-O Strategies 1. Focus on Plan to win to attract customers and expansion in other countries (S5, O2, O6). 2. Expansion in market share by more investments in Asia (S2, O2).

W-O Strategies

1. Minimize customers losses by
provide low cost menu and discounts (W3, O6, O7).

1.

2. 3.

Threats Health professionals and consumer activists accuse McDonald's of contributing to the country’s health issue of high cholesterol, heart attacks, diabetes, and obesity. The relationship between corporate level McDonald's and its franchise dealers. McDonald’s competitors threatened market share of the company both internationally and domestically.

S-T Strategies

W-T Strategies

1. More control on franchise dealers 2.
to maintain McDonald's reputation and quality (S1, T2). Provide new product and keep innovation (S7, T3).

1. Applying 0 grams Trans fat in 2.
all worldwide McDonald's (W1, W4, O1). Transfer from HCFC-22 to HFC (hydrofluorocarbon)-free (W5, T6)

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SPACE Matrix
Financial Strength Return on investment Leverage Net Income EPS ROE Cash Flow Average Competitive Advantage Market share Product Quality Customer Loyalty Control over other parties Rating 4 4 6 5 5 4 4.67 Rating -1.00 -1.00 -1.00 -2.00 Environmental Stability Rate of inflation Demand Changes Price Elasticity of demand Competitive pressure Barriers to entry new markets Risk involved in business Average Y-axis Industry Strength Growth potential Financial stability Ease of entry new markets Resources utilization Profit potential Demand variability Average X-axis Rating -3 -3 -1 -3 -3 -2 -2.5 2.17 Rating 5 5 4 4 5 3 4.33 3.08

Average

-1.25

Directional vector point is :( 3.08, 2.17)
FS Conservative Aggressive

C

IS

Defensive

Competitive ES

Grand Strategy Matrix
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Rapid Market Growth Quadrant II Quadrant I

Weak Competitive Position

Strong Competitive Position Quadrant III Quadrant IV Slow Market Growth

The Boston Consulting Group (BCG) Matrix
Relative Market Share Position

MCD Industry Sales Growth Rate

Stars

Question Marks

Cash Cows

Dogs

The Internal-External (IE) Matrix
The IFE Total Weighted Score

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Strong 3.0 to 4.0 I II

Average 2.0 to 2.99 III

Weak 1.0 to 1.99

High 3.0 to 3.99

IV The EFE Total Medium Weighted Score McDonald's 2.0 to 2.99

V

VI

VII

VIII

IX

Low 1.0 to 1.99

The Quantitative Strategic Planning Matrix (QSPM)
Strategy 1 Expand further in Asia by adding 500 restaurants Strategy 2 Applying 0 grams Trans fat in all worldwide McDonald's restaurants

Key Internal Factors Strengths Strong brand name, image and reputation Large market share Strong global presence Specialized training for managers known as the Hamburger University McDonalds Plan to Win focuses on people, products, place, price and promotion

Weight 0.12 0.10 0.04 0.04 0.12

AS 4 4 4 4

TAS 0.48 0.40 0.12 0.48

AS 4 2 2 4

TAS 0.48 0.20 0.08 0.48

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Strong financial performance and position Introduction of new products Customer focus (centric) Strong performance in the global marketplace Weaknesses Unhealthy food image High Staff Turnover including Top management Customer losses due to fierce competition Legal actions related to health issues; use of trans fat & beef oil Uses HCFC-22 to make polystyrene that is contributing to ozone depletion SUBTOTAL

0.08 0.06 0.06 0.08

4 1 3

0.32 0.06 0.24

4 4 1

0.32 0.24 0.08

0.08 0.10 0.04 0.04 0.04 1.00

1 3 1 -

0.08 0.12 0.04 2.34

4 1 4 -

0.32 0.04 0.16 2.40

Strategy 1 Expand further in Asia by adding 500 restaurants

Strategy 2 Applying 0 grams Trans fat in all worldwide McDonald's restaurants

Key External Factors Opportunities Growing health trends among consumers Globalization, expansion in other countries (especially in China & India) Diversification and acquisition of other quickservice restaurants Growth of the fast-food industry Worldwide deregulation Low cost menu that will attract the customers Freebies and discounts Threats Health professionals and consumer activists accuse McDonald's of contributing to the country’s health issue of high cholesterol, heart attacks, diabetes, and obesity The relationship between corporate level

Weight 0.08 0.12 0.04 0.10 0.04 0.08 0.08

AS 1 4 4 4 -

TAS 0.08 0.48 0.40 0.16 -

AS 4 1 4 1 -

TAS 0.32 0.12 0.40 0.04 -

0.10

1

0.10

4

0.40

0.09

4

0.36

1

0.09

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McDonald's and its franchise dealers McDonald’s competitors threatened market share of the company both internationally and domestically Anti-American sentiments Global recession and fluctuating foreign currencies Fast-food chain industry is expected to struggle to meet the expectations of the customers towards health and environmental issues SUBTOTAL SUM TOTAL ATTRACTIVENESS SCORE

0.12 0.07 0.04 0.04 1.00

4 1

0.48 0.04 2.10 4.44

4 4

0.48 0.16 2.01 4.41

Recommendations Expand further into Asia markets over a 2-year period by adding 500 restaurants per year at a cost of $4 billion annually, and applying 0 grams Trans fat in all worldwide McDonald's restaurants.

References
1. www.mcdonalds.com 2. www.moneycentral.msn.com 3. www.mcdonalds.ca

4. Strategic Management concepts and cases by Fred David 12 edition 5. Exploring Corporate Strategy text & cases 8th edition 6. U.S. Environmental Protection Agency

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